Compulsory annuity purchase will remain for most, despite the supposed biggest shake-up of pensions in a generation that on first read will allow millions of retired people to dip into their pension fund as and when they like. And it will be made easier for the elderly who die with a large sum of unused pension fund to pass it on free of Inheritance Tax, the Government has announced. Plans to scrap laws that force pensioners to buy an annuity have been confirmed.
Laith Khalaf, of Hargreaves Lansdown, said that the Government is making pensions more attractive to encourage people to save more for our retirement. Many people do not want to buy an annuity because that means their pension fund monies are effectively gone for ever. People don’t like the thought of dying 10 days later and having an insurance company gobble up the pension fund they built up over many years, he added.
Last year, life insurance companies sold £11billion worth of annuities. They provide an income and must be bought before the purchaser reaches the ripe old age of 75. A 65-year-old man with a £100,000 pension fund would get an income around £550 a month from his annuity purchase. However, if he was to die three months after taking it out he would have had only three months income, and the unused amount would be the insurance company’s. The new rules will stop this situation. Instead, retirees with a pension income of at least £10,000 a year will be able to draw down as much income as they want from their fund. Below £10,000, amounts will actually be capped. Currently, if someone aged over 75 dies with at least £100,000 in their pension pot, that amount is subject to tax at 82%; under the new system, anyone inheriting a pension pot will pay only a 55% per cent “recovery charge” which they can escape by taking it as income instead.
Philip Brown, of Partnership, said that there is some extra flexibility in these plans, but, in reality, only a few more wealthy people with enough money put aside will benefit. The remainder will still look to buy an annuity for their retirement income; the 7.8 million workers saving into defined contribution money purchase schemes and millions more who are likely to join them as final salary arrangements are killed off.